fredag 21. desember 2012

Why was Hayek given the Nobel Prize ?

1) That ABCT developed by Hayek is completely wrong (even though basically a watered down version is the Minsky business cycle theory, only 50 years late)

"It is astonishing that one of the two main reasons given for Hayek’s Nobel Memorial Prize was his business cycle theory: for this was precisely that part of his research program that was a clear failure. Hayek never succeeded in creating a monetary theory of the trade cycle that evaded the serious criticisms his opponents levelled against it, which included the non-existence of the Wicksellian natural rate of interest, the role of subjective expectations, and the questionable role of general equilibrium theory in his theory. "

These claims are endlessly recycled on this webpage, so I thought I might critique them shortly.

1) The wicksellian natural rate is simply a representation for what would be the interest rate if no unbacked credit creation took place, or more easily understood if all monies were a commodity.

The fact that there exist no 1 interest rate, does not concern this.

Neither does the fact that futures prices differ, as that has to do with the demand and supply schedules for each product (grains, shares etc.). No "futures" market existed for gold under the gold standard, and gold was the common medium of exchange. Interest rates in a pure gold standard, is thereby the "natural rate".

I admit that the notion of a natural rate as inaccurate modern expositions of the theory, but it does not take away from the essence of the theory.

2) Subjective expectations is not really a useful term. All action is foreward looking, and all goals are subjective. This is basic Austrian ideas, and thereby all actions regarding saving, investment and spending are ALWAYS foreword looking.

3) General equilibrium is used, unfortunately in Hayeks exposition. But that is in Prices and Production, when he was a visiting professor in England trying to teach neoclassically trained economists the Austrian Business Cycle Theory.

Furthermore, he is trying to show how the slump is what is experienced in trying to go from one point, boom phase, to another point, the bust.

The Economic Settings of 1973-74

In over 40 years, the Keynesians led by men like Kaldor, Hansen, Samuelson and Lerner had taught the world that credit expansion was positive as long as one "controlled" price-inflation.

Furthermore they had vigirously attacked the gold and proposed exchanging it for the government paper money. Their Frankenstein was the supposedly "eternal" Bretton Woods System.

After Nixon closed the gold window to avoid devaluation or honest default, largely as a necessity for his upcoming reelection, the world was led precisely into a pure fiat money system. Nixon, had also in the heat of the moment imposed price controls which was mainly advocated by Keynesians and Marxists.

The resulting social chaos made it seem the world was on the verge of breakdown. Furthermore, the enormous boost given to credit expansion and resulting price inflation that the economy contracted and had quickly resulted in a worldwide financial crash in a classical Austrian fashion.

Most Keynesian economists had their models of public control of employment etc. completely shattered and there seemed to be an opening for wheening of the socialist economics of John Maynard Keynes.

The Professor of Economics at Lund University, Ingemar Ståhl, was well-versed in Wicksellian theory and Hayekian business cycle theory. He sat on the board of Nobel Prize in Economic Science and believed he needed to get the Austrian perspective into circulation. Therefore he pushed for and achieved a consensus to award him the prize, given that the worldwide crisis illustrated clearly the correctness of Austrian Business Cycle Theory.

Added:Paul Samuelson also seems to confirm my story:"Hayek was the seventh to receive the Bank of Sweden’s new Nobel Prize in economics. In my judgment his was a worthy choice. And yet in the 1974 senior common rooms of Harvard and MIT, the majority of the inhabitants there seemed not to even know the name of this new laureate. (By contrast, the following year when I was in Stockholm to celebrate the 75th anniversary of the original ﬁve Nobel Prizes, it was my vague impression that the Royal Swedish Academy electors paid greater deference to Hayek than to their own native son Myrdal."

Philip Plikington(supposedly a journalist) and Socialdemocracy launch straight into an attack on Hayek, trying to make him out as a political hack. But in fact it was Myrdal who was the political hack, necessary to avoid the Swedish socialist authorities vicious attacks on a "reactionary"(marxist term for anyone opposing socialism). Because in fact it was very dangerous to be a free-marketeer pre-1980 carriere wise, alot more than being a marxist professor in the US.

Conclusion

Hayek was awarded the prize, because his (ABCT) perspective on the causes of the cycle was shown to be spectacularly correct and because the Keynesian framework was shown to be spectacularly incorrect.